Officials at the Federal Reserve raised the target federal funds rate by half of a percentage point, marking a slight slowdown in the most aggressive contractionary policy rollout in decades.
The move comes after the Federal Open Market Committee raised target rates in June, July, September, and November. The current target rate is now set between 4.25% and 4.5%.
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Federal Reserve’s Board of Governors said in a statement.
Officials are presently seeking to end nearly three years of aggressive monetary stimulus, including near-zero target interest rates and the purchase of government securities from market actors, established in response to the lockdown-induced recession. Policymakers have raised rates by three-quarters of a percentage point on four consecutive occasions, raising the cost of borrowing money for consumers and businesses and heightening the risk of a recession.
Federal Reserve Chair Jerome Powell recently confirmed that officials would “moderate the pace of our rate increases” as soon as this month. “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt,” he said. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
The rate hike comes shortly after the most recent inflation report from the Bureau of Labor Statistics showed that the Consumer Price Index rose 7.1% year-over-year as of November in a reading that was below analysts’ forecasts. An increase in food prices of 0.5% and an increase in shelter prices of 0.6% contributed to the headline number as energy prices fell 1.6%.
Policymakers at the Federal Reserve, which has a dual mandate of ensuring stable inflation and low unemployment, have likewise been carefully tracking the labor market. Joblessness remained historically low in November as the number of new positions soared past economists’ forecasts, according to another report from the Bureau of Labor Statistics. The unemployment rate, 3.7%, was unchanged from the previous month.
Labor force participation rates have nevertheless lagged as many workers did not return to their positions after lockdowns produced significant job loss. Powell recently remarked that the workforce “participation gap” is largely a result of “excess retirements” that occurred beyond “what would have been expected from population aging alone,” even as younger cohorts generally return to the job market.
“In the labor market, demand for workers far exceeds the supply of available workers,” Powell continued, observing that nominal wages have grown faster than the rate expected under 2% inflation. “Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market.”
Rising mortgage rates induced by efforts from the Federal Reserve to control inflation have caused volatility in the housing market. The 30-year fixed mortgage rate remained below 3% for much of the past two years, according to data from government-backed mortgage company Freddie Mac, before briefly rising above 7% last month. Rising rates have decreased affordability even as evidence of a decline in home prices continues to mount.